Another look at the role of borrower characteristics in predicting mortgage prepayments

Mortgage prepayments are made for many different reasons, and research has been hampered by the inability to distinguish among those reasons for prepayment. In this article, I report results of a loan-level model where full information is available: namely, when the borrower refinances a mortgage with the same lender. With access to detailed loan-level data, the role of a number of loan and borrower characteristics can be examined. After eliminating borrower mobility and liquidity demand factors, inclusion of loan and borrower char-acteristics unambiguously increases model explanatory power. But changes in predicted prepayment probabilities are most pronounced when the prepayment option is at-the-money. When the option is deeply in- or out-of-the money, borrower characteristics have little influence. This article presents the first major empirical investigation of ªpureº refinancing behavior, while explicitly incorporating cur-rent actual borrower credit score and estimated current loan-to-value ratio as potentially limiting constraints